Bank of England policymakers considered an even bigger reduction in interest rates - of more than two percentage points - when they voted to lower them by 1.5 points earlier this month, but worried this could be too much of a shock for financial markets.

The news raised expectations in the City of a further one-point move next month, which would take rates down to 2%.

Minutes of the meeting, released this morning, showed all nine members of the monetary policy committee voted in favour of the cut, which took the Bank's base rate to 3% from 4.5%. The committee's deliberations suggest it stands ready to move again aggressively to bring borrowing costs down in a bid to stimulate the economy.

Last week the Bank published its latest forecasts for the economy, which show it sinking into a deeper recession than previously thought, while inflation could fall to 1%, far below the Bank's 2% target.

"Monetary policy boring? Clearly not any more," said Marc Ostwald of Monument Securities. "The fact that they considered 200 basis points at this month's meeting will surely trigger a shift in market expectations for December to a 100 basis points cut. Bad news for an already beleaguered pound, particularly if Alistair Darling goes on a borrow-and-spend spree as is largely expected for next Monday's pre-budget report."

The MPC said its latest forecasts showed that a "very significant reduction in the Bank rate – possibly in excess of 200 basis points – might be required in order to meet the inflation target in the medium term". However, it opted against such a big move this month for a number of reasons.

A "key concern" was the degree of surprise to financial markets. "Too large a surprise could pose upside risks to the inflation target if the resulting depreciation of sterling was excessive," the committee said. Some members thought there was a case for leaving some of the "required policy loosening to the months ahead to support confidence as the economy weakened".

The pound fell to $1.4964 after the minutes were released, from $1.4987 just before. It also weakened against the euro, now worth 84.18p.

Policymakers also argued that it made sense to wait until after the government's pre-budget report. It is expected to include tax cuts and other measures to help families and businesses, which could reduce the need for future rate cuts.

While the banking measures that have been introduced around the world have restored some stability to the banking system, it was unclear how the supply of money and credit to the wider economy would respond and the committee wanted to wait and see how these measures were working, it said.

Ross Walker at RBS said: "The fact that there was such a radical cut suggested to us that there had been a fundamental rethink within the committee. And quite possibly a new consensus forming, certainly a significant narrowing between the hawks and the doves."

About this article

Bank of England considered two-point interest rate cut

This article was published on
the Guardian website
at 07.35 EST on Wednesday 19 November 2008.
It was last modified at 07.36 EST on Wednesday 19 November 2008.
It was first published at 05.45 EST on Wednesday 19 November 2008.